Spending Up, Incomes Flat, Savings Down

Some strange and contradictory news on our nation's economy; consumer spending was up in February, even though incomes were stagnant.

Consumer spending increased 0.3%,, and though February marked the fifth straight month with an increase, it was the smallest increase since September.

The February income number was the weakest since July, when incomes actually shrank.

People generally aren't inclined to increase spending when their incomes are flat, especially during a recession. So what gives?

The answer is that Americans tapped into their savings to fuel the spending uptick.

Americans saved 3.1% of their disposable income in February, down from 3.4% in January. That's a difference of 0.3%, exactly the same as the spending increase. It' wasn't a coincidence.

The savings rate dropped to its lowest reading since October 2008, when the financial collapse began.

The resulting fear and panic from the recession lead people to stop spending as much and instead begin paying down debts and saving. Those were both wise and, perhaps, expected choices given the environment.

Since consumer spending accounts for 72% of GDP, it's a good indicator of how the economy is faring. If people aren't spending, the economy is shrinking – unless the government leaps into the void, as it did last year.

Historically, savings rates tend to increase during times of recession.

During the early 1980s, when the economy was in a severe double-dip recession, the annual personal saving rate (effectively, income minus spending) averaged around 10%.

But by the time of the 1990-91 recession, it had fallen to an average of 7%.

And by 2001, the rate had fallen below 2%. As the decade progressed, it even fell below 1% multiple times.

The reality is that rate has been falling steadily for many years. In fact, in 2005, at the height of the American spending and debt binge, the savings rate actually turned negative for the first time since the Great Depression. And it stayed that way for a couple of years.

But when the economy nearly collapsed in 2008, the savings rate started to trend higher. It jumped from 1.3% in January of 2008, all the way to 6.9% in May of 2009 – the highest rate in 15 years.

However, it declined once again, to 4.2% in December of 2009. And now it's on the decline once again.

The previous uptick in savings had been a good sign, indicating that Americans were putting an end to their debt-based spending.

A higher savings rate is critical because it makes more money available for business investment. And it can reduce the need to borrow from overseas.

But it also led to a slow down in the economy.

Last week, the Commerce Department reported that personal income in 42 states fell in 2009. Nationally, personal income from wages, dividends, rent, retirement plans and government benefits declined 1.7% last year, unadjusted for inflation.

If Americans are worried about jobs and wages, then they won't continue to spend. Instead, they remain in retrenchment.

But if the car breaks down, or medical bills need to be paid, they will tap their savings – until there are no savings left to tap.

Social Security Facing It's Long Feared Day Of Reckoning

For years we were warned that this day would come, and its rather sudden arrival will present challenging consequences.

The Congressional Budget office has announced that the Social Security system will take in less money than it will pay out this year. That wasn't expected to happen until 2016, but the drop in payroll taxes has created an immediate shortfall. Simply put, there are fewer people working and therefore fewer people paying taxes.

Though the Social Security Administration says the deficit won't affect recipients this year, it will become a problem if the economy doesn't rebound quickly.

The Baby Boomers began retiring this year, and they will continue to do so for roughly the next 20 years, putting great demands on the system. To make matters worse, the high unemployment rate has driven large numbers of people to apply for disability payments, which come from the same system.

One has to wonder how long this situation will last, or how long it can last? And is this the beginning of an irrevocable change?

The latest projections showed that the program would exhaust its funds in 2037, but that now seems optimistic.

The unemployment projections for the next decade are bleak, which will keep revenues low even as demands continue to grow. The Baby Boomers are the proverbial "pig in a snake's belly" of our nation's retirement system.

The system currently has a $2.5 trillion balance from previous decades when more money was flowing in than out. But that will be chipped away in coming years as this trend is reversed. This year, for example, the fund is projected to run a $29 billion deficit.

At some point, outlays are going to irretrievably surpass revenues and at that point the current system will be spent. The solutions are some combination of tax hikes, reduced benefits, and/or an increased retirement age, which is already 66. The age progresses to 67 for those born in 1960 and after.

Any of those proposals will be politically unpopular, but necessary nonetheless. The resulting Congressional battle will be interesting, and the topic will certainly be an election year issue. Tinkering with Social Security has long been viewed as the "third rail" of electoral politics. Older people vote enthusiastically.

The reality is that the alleged $2.5 trillion surplus doesn't even exist; the government spent it. The funds were used to finance deficit spending.

At best, it was a wildly irresponsible misappropriation. At worst, it was a criminal theft from the taxpayers.

From 1937 (when the first payments were made) through 2007, the Social Security program expended $10.6 trillion. But in that same period, the program program received $13.0 trillion in income. But the $2.4 trillion balance was recklessly spent by Congress on other programs.

Meanwhile, the surplus revenues have been continually shrinking since 2007, as the economy contracted and unemployment ballooned.

It is clear that – like it or not – tax increases are coming, as well as cuts to entitlement spending. Means-testing may be introduced so that richer Americans only get back what they put into the Social Security system and nothing more.

According to the Social Security Administration, life expectancy at birth in 1930 was just 58 for men and 62 for women, But men who were 65 in 1935 could expect to live another 12 years, while women faced an average 13 more years. Meanwhile, the retirement age was set at 65.

However, life expectancy has now reached an average of 78 years (76 for men; 81 for women). And life expectancy at age 65 is now 17 years for men and 20 years for women. That means that by retirement age, men and women can now expect to live to 82 and 85, respectively.

The Social Security payroll tax and wage base were much lower when most current retirees were working and contributing to the system. For example, back in 1960, the maximum amount of payroll tax for one earner was just $288. In 1972, it was only $419 a year. And as recently as 1975, it had only risen to $1,650, annually.

The reality is that many older people paid in relatively little compared to their current benefits. As a result, most retirees get back significantly more than they contributed. Obviously, the system was not designed to support this burden.

The Baby Boomers – all 76 million of them, amounting to 25% of our population – began retiring in mass this year and will continue to do so for the next two decades. Unfortunately, however, a significant portion of their contributions have already been spent.

Despite that bitter reality, naturally they still expect the government to keep its promises.

Global Debt Crisis Reaching Critical Mass

First came the Dubai debt crisis. That was followed by the Greek debt crisis. But they are just the first ripples in what is a global tidal wave of debt.

Despite their relative burdens, both nations have minor debt problems compared to many other nations, even large Western economies.

Greek public debt is about 120% of gross domestic product. And its current deficit is a whopping 13% of GDP. That is twice what the previous government had been admitting prior to last October's election. The difference shocked, and rocked, world markets.

Economists note that a nation's deficit should not exceed 3% of GDP in any given year.

Greece hopes to achieve the Herculean task of reducing its deficit to 3% of GDP in just three short years. That's a tall order, and one that many are betting against.

In fact, Wall St. — which helped Greece hide its debt for years through the use of arcane financial instruments — is indeed betting against the Mediterranean state.

As Greek Prime Mininter George Papandeou noted to Charlie Rose, this is like "taking out insurance your neighbor's house, and if it burns down, then you get the money... That is, you want to bet on the failure of someone, or in this case a whole economy, like Greece."

German Chancellor Angela Merkel also voiced similar concerns. "Institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere," she noted.

It's little surprise. That's just how Wall St. works. It's plainly ruthless.

The trouble for Europe, and the world in general, is that Greece is not an isolated case. It has lots of company; Portugal, Ireland, Italy and Spain also have painful deficits and staggering debts. This group of nations is collectively referred to as the PIIGS, a fitting acronym.

Iceland, another debt-ravaged nation, has already melted down and there’s also concern about the Baltic states, whose balance sheets are a mess.

For example, the government of Latvia recently collapsed in the midst of enormous economic turmoil. Unemployment has now hit 20% and the economy contracted by 18% last year.

The weaker Eurozone nations are looking to the more economically powerful Germany and France to save them. But the dirty little secret is that both of those nations are also wallowing in their own enormous debts.



The burgeoning debt crisis has spread around the globe, like a contagion.

Last fall, The Business Insider ranked "The 10 Countries Most Likely to Default." Here's that list, in order, along with the cumulative probability of default:

1. Venezuela - 60%
2. Ukraine - 55%
3. Argentina - 49%
4. Pakistan - 36%
5. Latvia - 30%
6. Dubai - 29%
7. Iceland - 23%
8. Lithuania - 19%
9. California - 18%
10. Lebanon - 17%

We've already seen the implications of the debt problems in three of these nations; Latvia, Dubai, and Iceland.

Yet, the other nations on the list have barely generated any interest or coverage by the financial news media. Instead, the group of nations known collectively as the PIIGS are getting all the attention.

However, the economies of Argentina (#24 in GDP), Pakistan (#28), Venezuela (#32), and Ukraine (#40) are considerably larger, and their burdensome debts more worrisome, than either Latvia, Dubai, or Iceland.

As noted, Iceland has already gone bust once. Only an emergency $6 billion bail-out from the International Monetary Fund enabled its economy to keep functioning. That's a pittance compared to the debt problems faced by other nations around the globe.

The pressing question for Iceland is whether it could happen again. Iceland's central bank already expects the economy to contract more than 3% this year after a steep fall in 2009. Further loans by the IMF have been held up, and meanwhile Iceland's economy remains in tatters.

The people of Iceland resent being stuck with a bill for the misdeeds of a handful of foreign bankers supposedly under the watch of foreign governments. They want their government to focus on helping its own citizens get through the crisis before repaying foreign obligations that resulted from the malfeasance of bankers.

The citizens of Greece seem to feel similarly; protests and riots have swept the nation. The Greek people are both angry and scared.

It's worth noting that most of the nations getting all the attention for their debt problems have relatively small economies and debts.

According to the CIA World Factbook, Greece has the world's 34th biggest economy, at $339 billion. Portugal is #50, with a $232 billion economy. Ireland, at #56, has a $177 billion economy. And little old Iceland, with its tiny $12 billion economy, is #142.

There are much larger problems on the world stage.

Japan has the world's fourth largest economy, registering $4.1 trillion. It has a staggering debt amounting to 200% of GDP. Think about that for a moment.

The UK, the world's seventh largest economy at $2.1 trillion, is facing a massive debt burden and a depressed currency. Famed investor Jim Rogers has predicted that the British pound could collapse within weeks. The UK faces a deficit that is 12.5% of GDP (similar to Greece), and a national debt equaling 72% of GDP. But when private debt is added, things get a lot worse.

A study by the McKinsey Global Institute found that the UK has the world’s worst private and public debt in comparison to GDP, with a ratio of 470%. Yet, due to artificially low interest rates, the problem may actually be getting worse.

Italy, the 11th biggest economy in the world, has a GDP of nearly $1.8 trillion. It has a troubling debt problem that hasn't fully gotten the world's attention — yet.

And Spain, the world's 13th largest economy, with a GDP of nearly $1.4 trillion, is another debt-saddled country weighing heavily on the EU.

The Maastricht Treaty's Excessive Deficit Procedure sets deficit and debt targets of 3% and 60% respectively for all EU countries. By that measure, many of these nations shouldn't even be allowed in the EU, much less the Euro Zone.

Then there's the US. It currently has a budget deficit that is 10% of GDP, and the 2011 deficit is projected to rise to 11% of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. Imagine that.

This reality scares the foreign governments and pension funds that have long supported US deficit spending. Eventually the market will force higher rates to compel these investors. And higher interest rates will be a drag on the economy, restricting investment and recovery — much less any possible growth. As it stands, China has already begun selling Treasuries, a very bad sign.

The US government and the Federal Reserve are propping up the US economy, but their Atlas-like efforts are bound to eventually fail. The weight of reality is simply too heavy. Rising interest rates will make servicing the utterly massive US debt crippling.

With interest rates at artificially low levels, due to the manipulations of its central bank, the US and its citizens — like many of the aforementioned nations — have been able to borrow at interest rates that do not reflect their true financial situation. That has encouraged overspending, indebtedness, and malinvestment.

Typically, the US would expect — or hope — to grow its way out debt. But exports account for just 13% of the US economy. And absent government spending and intervention, the US economy is actually shrinking.

In what can only be viewed as absurd, 71% of the US economy relied on consumer spending in 2009. But American consumers are retrenching as they worry about debts, jobs, the economy and their own financial security. Americans are simply hanging on, not spending. So the economy will only shrink, unless the government keeps on spending. And it will.

Our economy is predicated on growth and nothing else will do in such a system. In the absence of consumer spending, the government will continue jumping into the breach — to our detriment. It may appear well-intended, but such intervention will be political in nature. The politicians are expected to do something. But you can't cure a debt crisis with more debt.

That game can only continue for a limited period, as the federal debt will increase faster than any resulting economic growth. As it is, the federal debt will likely equal, or even exceed, the GDP by the end of this year.

Trying to spend the nation out of its economic malaise presents a problem for a government mired so deeply in debt.

The government could afford massive Keynesian spending policies during the Great Depression because it didn't enter that crisis with the kind of massive debt it has today. Total US debt (both public and private) was 260% of GDP during the 1930s, but has now reached 370%.

Back then, our debts remained relatively fixed in size, while it was the GDP that fell away from under the debts.

But our current debt continues to grow, and it weighs heavily on the economy. In essence, our debt and our GDP are moving in the wrong directions.

The US needs to significantly reduce spending, especially since its economy is contracting. But about two-thirds of the federal budget is comprised of just five things: Medicare/Medicaid, Social Security, military spending, and interest payments on our debt.

Even if deficit spending were to cease immediately (which it won't), as soon as interest rates rise from their record-low levels (which they will), those debt payments will become massive and debilitating.

For decades, the US, like many other nations of the world, hid behind a fallacy of growth by not factoring in all the debt created in the pursuit of that growth. All of this debt has resulted in a lack of savings to fund private investment.

Total US debt, both public and private, doubled from 2000 to present, ballooning from $26 trillion to $53 trillion.

However, the nation's total private net worth is $51.5 trillion, according to the Federal Reserve. By this measure, the US is now officially bankrupt. Since the US cannot possibly pay off its epic debts, its only choice is to inflate and devalue its currency.

But the above figure doesn't even begin to reflect the scope of our nation's true debt problem. As of 2009, the unfunded liabilities of Social Security and Medicare amounted to a staggering $106.8 trillion. Obviously, that's an obligation that can never be paid.

As bad as things are here in the US, we are not alone in facing a growing debt crisis. As noted, the problem is spreading like a global contagion.

According to a recent report by McKinsey Global Institute, the UK debt to GDP is about 470%, Japan 460%, Spain 340%, South Korea 340%, Switzerland 315%, France and Italy about 300%, Germany 275%, and Canada 245%. All are records of debt to GDP.

As a result, the subsequent global deleveraging will be a very painful process and take years to resolve. Unfortunately, what we are going through will rival the Great Depression and is truly historic in nature.

For decades we lived under the illusion that debt was growth. But now that illusion is shattered. As a nation, we spent years living above our means, and now we will spend years living below them.

Lehman Bros. an Example of Massive Wall St. Fraud

Lehman Brothers' bankruptcy examiner Anton Valukas has issued a damning report revealing just how corrupt the now bankrupt Wall St. institution really was.

Apparently, fraud, cheating, lying and the manipulation of its books were simply a way of life at Lehman. The once-venerable investment bank was institutionally corrupt, and likely an example of just how routine illicit business practices have become on Wall St.

The examiner's exhaustive 2,200-page report illustrates the unethical (perhaps illegal) practices of former Lehman executives, as well as its auditor, Ernst & Young.

The whole affair is entirely reminiscent of the Enron scandal, in which its accounting firm, Arthur Andersen, cooked the books and helped the energy giant cover up its absolutely massive and historic fraud.

The new report reveals a brazenly fraudulent accounting practice, known as Repo 105.

Using this scam, assets were shifted off Leman's books at the end of each quarter in exchange for cash. This was done via a clever accounting maneuver that made its leverage levels look lower than they really were. Then Lehman would bring the assets back onto its balance sheet days after issuing its earnings report.

Lehman was determined to make its quarterly reports look more appealing.

To create the appearance that its leverage levels were within reason, Lehman would “sell” assets (typically highly liquid government securities) to another firm in exchange for cash, which it would then use to pay down its debt. The assets were typically worth 105 percent of the cash Lehman received. Several days later, after reporting its earnings, it would subsequently repurchase the assets.

Normally, this would be considered a loan, or repurchase agreement, but instead it was booked as a sale.

Massive sums of money were flowing in and out of Lehman in successive quarters.

According to the examiner’s report, “Lehman reduced its net balance sheet at quarter-end through its Repo 105 practice by approximately $38.6 billion in fourth quarter 2007, $49.1 billion in first quarter 2008, and $50.38 billion in second quarter 2008.”

The latter were the final two quarters before the investment bank's inevitable collapse.

What is now clear is that Lehman was engaged in an institutional practice of deception. The well-crafted ruse was designed to fool investors and creditors about the investment bank's health.

According to Valukas' report, Lehman executives used "materially misleading" accounting gimmicks, and former CEO Richard Fuld was "at least grossly negligent in causing Lehman Brothers to file misleading periodic reports."

But what is most stunning about the report is that a team of officials from the Securities and Exchange Commission and the Federal Reserve Bank of New York had moved into Lehman Brothers' headquarters while this scam was being perpetuated. And they were either so inept as not to notice, or they willingly looked the other way.

How's that for regulation?

At any given moment, there were as many as a dozen government officials inside Lehman’s offices, with access to all of Lehman’s books and records.

And yet they found nothing until June 2008, when a lower-level executive sent a letter to management taking issue with the firm’s practices. Despite being ensconced inside Lehman's headquarters, the S.E.C. and Fed officials found nothing amiss.

If nothing else, this is a reminder of the corruption on Wall St, and why it cannot be trusted. Its valuations seem to be nothing more than pure fantasy.

And the notion of regulation is equally fantastical. After all, Lehman perpetuated this fraud right under the noses of supposed government regulators.

Perhaps these government agencies cannot be trusted either.

It's worth noting that current Treasury Secretary Tim Geithner was heading the New York Reserve Bank at the time. And it was Geithner that sent his "regulators" into Lehman, as well as Goldman Sachs, Morgan Stanley, Merrill Lynch, and others.

Who knows what else we still don't know?

The question is this; were government regulators inept, or complicit? Were these officials useless buffoons, or criminal participants in a massive fraud? Either answer effectively ruins their credibility, as well as any previous faith the public may have had in these regulatory agencies.

With all of this in mind, it's good that the unethical Lehman collapsed, a victim of its own lies and excess.

And the other Wall St. firms, likely equally fraudulent and wracked by their own excess, should have been allowed to collapse along with it, just like Bear Stearns.

Good riddance.

Mortgage Delinquencies at All-Time High

The latest report from Lender Processing Services shows that mortgage delinquencies have reached an all-time high.

More than 7.4 million home loans nationwide are in some stage of delinquency or foreclosure. And another one million properties are either bank-owned or have been sold out of foreclosure.

But what's truly stunning is that 10% of all U.S. loans are delinquent.

That huge volume of delinquent loans will assure another wave of foreclosures, a terrible sign for the housing market, as well as the overall economy.

As goes housing and employment, so goes the economy. And right now, it's a perfect trifecta of misery.

The difference between now and, say, a year ago is that delinquencies are hitting borrowers with good credit who have regular fixed-rate mortgages.

The other disturbing statistic is that older loans make up a higher percentage of new delinquencies.

All of the resulting foreclosures will result an ever-increasing inventory that will only serve to drive down home prices even further.

It's weird when the good news is that, "The pace of deterioration has slowed," as LPS noted. That sounds kind of hollow at the moment.

The worst-hit areas are the usual suspects: the boom-and-bust states of Florida, Nevada, Arizona and California, plus the economically savaged areas of Michigan and Ohio. However, few states are escaping the problem.

As further evidence of the crippled market, the government reported today that new home construction and building permits fell in February.

And once again, the good news was that the declines were better than some economists had forecast.

Feeling optimistic yet?

The fact that new home starts and building permits declined is a natural outcome of a market flooded with inventory. Who wants to buy a brand new house when there are so many foreclosures for sale?

Considering all the government intervention and price supports in the housing market, this may be as good as it gets.

The Fed is scheduled to end its purchases of mortgage-backed securities at the end of the month. That intervention has been artificially holding down interest rates. And the home-buyer's tax credits are set to expire on April 30.

How bad the market will become when those programs end is anybody's guess. But it doesn't take a soothsayer to predict that it won't be good.

Unless and until unemployment makes a significant change for the better, the housing market won't just remain in distress; it will just continue to deteriorate.

Lots of Banks Going Broke, as is FDIC

A total of 30 banks have failed as of March 12, putting 2010 ahead of last year's pace when 140 banking institutions went under.

That was the highest total since 1992, when 181 banks failed at the tail end of the S&L crisis.

As of the end of last year, the FDIC said that 702 banks were at risk of going under, a number that has been steadily growing. And still, that seems to be a very conservative estimate.

CreditSights, which tracks bank failures, predicts that in the current cycle, from 2008 through 2011, as many as 1,100 banks will fail. That would wipe out 13.4% of all U.S. banks, representing 7% of U.S. banking assets.

Veteran bank analyst Gerard Cassidy of RBC Capital Markets agrees, expecting as many as 1000 banks to ultimately go bust.

Most of the troubled banks are concentrated at the regional and community level, and are weighed down by commercial real estate and construction loans.

The problem is that the $6.4 trillion commercial real estate market is under duress as businesses across the country go under. Stores are closing, mall vacancies are increasing, office space is all too available, and construction projects across the country have halted as builders have gone belly-up.

Between now and 2012, more than $1.4 trillion worth of commercial real estate loans will come due, according to real estate investment firm ING Clarion Partners.

However, the collateral value underlying many of these loans is depreciating. That means many borrowers will have trouble rolling over their loans, resulting in continued defaults and heavy bank losses.

Banks face up to $300 billion in losses on loans made for commercial property and development, according to a report by the Congressional Oversight Panel

The report also said that on nearly half of all commercial real estate loans, the borrowers owe more than the property is worth, and the biggest loan losses are expected for 2011 and beyond. In other words, the worst of the problems are just getting started.

And the money to cover this coming tidal wave of losses simply doesn't exist. The FDIC's deposit insurance fund was $20.9 billion in deficit as of December 31, the agency reported.

FDIC Chairman Sheila Bair said the fund is expected to bottom out this year, and that further bank failures are expected to cost the fund around $100 billion through 2013.

So, the FDIC is essentially broke. It will soon have to ask the equally bankrupt Treasury for a bailout. What an absurd proposition.

The true scope of the problems on bank balance sheets has been hidden as the government placated banks by radically changing age-old, sound, and transparent accounting rules.

This much we know; $6.4 billion in commercial real estate investments didn't qualify for refinancing in the first ten months of 2009. And nothing has changed. The problems are only worsening.

Since banks are not required to mark their loans to market prices, no one knows the true values of the loans on their books. But as the commercial real estate market nose dives, many more banks will go down with it.

Banks in jeopardy of failing simply aren't going to take on any risky loans. And in this environment, that means most loans.

When all these commercial loans can't be rolled over, it will only result in a very bitter irony.

The banks are damned if the do loan, and damned if they don't. But ultimately, American taxpayers will be stuck with the bills.

Decline In Trade Deficit A Bad Sign For The Economy

In years past, word that the US trade deficit had shrunk was generally greeted as good news. Not so today.

This week we learned that the trade deficit shrank unexpectedly, from $39.9 billion in December, down to $37.3 billion in January. This was due to a big drop in the importation of oil and foreign autos.

But here's the strange part; US exports declined as well, yet the gap still shrank. That's how low consumer demand is in the US right now.

Both are very bad signs for the US economy.

With American consumers financially tapped out, the US needs a strong export base to help begin its recovery. Though the US exports have been continually declining for years, the sales of civilian aircraft, machinery, and agricultural products dropped in January, a worrisome sign that the global economy is still on weak legs.

Of equal concern, a decline in oil imports indicates a decline in energy usage. While many may herald that as a positive sign for our oil addicted nation, it portends the continued sluggishness of the US economy. A lack of energy consumption indicates a slackened economic base and a lack of growth.

What's more, the nation's bill for imported petroleum plunged 5.4% in January to $25.4 billion, despite a higher average price for a barrel of oil. So, even as oil got more expensive, Americans spent less on it.

And the decline in foreign auto imports indicates the lack of demand by US consumers. Though car sales increased by 6%, year-over-year, in January, they were generally sluggish and disappointing since most fell from December levels.

For the most part, even the car companies that reported increases still suffered from declining sales to consumers, a sign of the continuing challenges facing the industry. The increases were due to big jumps in fleet sales to government and businesses, particularly rental car companies.

Though China reported that its exports rose in February by 45.7% from a year earlier, US consumers clearly weren't the reason why. Imports from China fell to the lowest level since June.

As the US manufacturing base has declined in recent decades, and as imports of oil and cheap foreign goods have increased, the trade imbalance skyrocketed. In 2006, the trade deficit rose to a record $817 billion, before coming down during the Great Recession.

In fact, things have been so out of balance that the last time the US had a trade surplus was 1975.

A trade surplus is preferable to a trade deficit since it generally implies that a nation's goods are competitive on the world stage, its citizens are not consuming too much, and that it is amassing capital for future investment and economic pursuits.

However, every year that there has been a major reduction in economic growth, it has been followed by a corresponding reduction in the US trade deficit. And, historically, the deficit has shrunk more so during times of recession – like right now.

That's a reason for concern since the trade gap had reached an eight-year low in 2009. In other words, the shrinking trade deficit contradicts any suggestion that a recovery is taking root.

A drop in global oil prices and the deep recession that cut the demand for foreign goods (even as it hurt US exports) has led to the trade deficit's decline.

A weaker dollar has also made US goods cheaper in foreign markets.

However, with exports accounting for just 13% of the US economy, the nation can't expect to export its way out of this recession. And the decline in imports is just further evidence of the retrenchment of US consumers.

The broad view indicates that we're still a long way from recovery.

Unemployment's New Normal

While there is presently optimistic talk of "green shoots" and economic recovery, as far as employment goes, we're a long way from recovery. In fact, we're a long way from what has traditionally been viewed as normal.

There is a growing concern – perhaps even sentiment – amongst many economists that the US has entered a new normal in unemployment. Gone, perhaps, are the days of a standard 5-6% unemployment rate, replaced by a new normal of roughly 10% unemployment.

How long will this new "normal" last? By many accounts, perhaps the rest of this decade. There are a number of reasons why.

During the Great Recession, the US has seen almost a doubling in the share of the long term unemployed (meaning those who have been jobless for six months, or longer) to 40%. And the median duration of unemployment has doubled over the past year, according to OMB Director, Peter Orszag.

Collectively, nearly 16 million Americans remain jobless. That number doesn't include those who have lost unemployment benefits and are no longer counted. Nor does it count those who have part-time jobs but want full-time work.

When those people are included, a whopping 17% of Americans are currently under-employed or unemployed. According to respected analyst John Williams, the true number is 22%. That's a sobering statistic which gives an indication of just how bad the employment problem is.

Of particular concern, a total of 6.3 million Americans have been unemployed for at least six months, the largest number since the government began keeping track in 1948. That's more than twice as many as in the early '80s recession.

According to Lawrence Katz, a labor economist at Harvard, for every job that becomes available, about six people are looking. That creates an enormous amount of competition and leaves many out of luck.

It's a trend that's expected to continue. Many older workers of retirement age are putting off retirement out of necessity. That leaves fewer positions available for younger workers.

As it stands, there are about 1.2 million unemployed college grads in America. The average graduate is carrying $20,000 in student loans. Those loans can't be paid off without jobs.

According to the National Association of Colleges and Employers, job offers to graduating seniors declined 21 percent last year, and are expected to decline another 7 percent this year.

All of this has negative consequences for our consumer driven economy. Obviously, there is less consumption when fewer people are working, and there is less disposable income directed back into the economy. And it also means that there will be lower government tax receipts at both the state and federal levels.

And if unemployment remains stubbornly high, wages will also remain stagnant. That could create a negative feedback loop that continues to lower consumer spending and economic output.

Between 1989 and 1999, 21.7 million new jobs were generated. But due to the Great Recession, job creation was negative in the last decade, declining by roughly eight million jobs.

It's part of a long trend; job creation has been slowing for decades.

According to the Economic Cycle Research Institute, during periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased about 3.5 percent a year. But during expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually.

And it's taking longer and longer to recover from each successive recession. The last time the jobless rate reached double digits, in the early 1980s, it took six years to bring it down to normal levels.

According to the Federal Reserve, the jobless rate could remain as high as 7.6 percent in 2012. And it would take two or three years after that for the job market to return to normal, the Fed says.

By some estimations, that's a best case scenario.

Many workers were in low-skill jobs that are never coming back. Millions of Americans are unprepared for the 21st Century workforce. The jobs for unskilled and low-skill workers have been permanently off-shored to Third World nations.

We've lost our manufacturing base, so we won't export out way out of this recession and into a job recovery. As it stands, exports make up just 13 percent of our economy.

And the nation doesn't just have to make up the eight million, or so, jobs wiped out during the Great Recession; it needs to keep up with a labor market that requires the creation of about 125,000 new jobs each month. But we've lost jobs in 24 of the last 25 months. Obviously, we're way behind.

To provide some perspective of the hole we're in, consider this: the government says that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force. Naturally, that hasn't happened.

Businesses will first shift some part-time workers to full-time positions before engaging in any new hiring. And many businesses will be happy to maintain part-time workers because they cost less; no benefits and no overtime.

When so many people are out of work, there is no incentive for employers to offer wage increases or high starting salaries. Beggars can't be choosers, and many professionals are working in jobs for which they are considerably over-qualified.

Since the dot-com bubble burst in 2000, workers wages grew by a meager 13 percent over the next 10 years, adjusted for inflation. That was the slowest pace in five decades, according to Moody's Economy.com.

And, also adjusted for inflation, median household income has gone backwards, from a peak of $52,587 in 1999 to $50,303 in 2008, according to the U.S. Census.

In addition, interest rates will eventually rise from their abnormally low levels. When they do, that could also have a dampening effect on job creation and economic expansion.

Ours it a credit-based economy. Yet, banks are reluctant to loan after suffering massive losses, much of it brought on by their own greed and negligence. Last year, 140 banks failed. This year may be worse.

Meanwhile, consumers and companies, scarred by the recession, are likely to restrain borrowing, spending and investing for years to come. Consumers are strapped and burdened by debt. We will not spend our way out of this. Taken as a while, all of this will only perpetuate economic stagnation.

Yet, our government, which is mired so deep in debt, needs a robust economic expansion to climb out of the hole it's in. But that isn't happening. At the same time, millions more Americans are now receiving government support in the form of food stamps and unemployment payments just to stay afloat.

The costs of providing unemployment benefits to all these millions of Americans is enormous requiring states and the federal government to take on even further debt.

The White House estimated the cost of unemployment compensation to exceed $140 billion for fiscal 2010, which began in October.

The Labor Department projects that eight million Americans will exhaust their regular 26 weeks of unemployment benefits in 2010. And the government is now allowing benefits up to 99 weeks.

Unless millions of Americans get more education and new job training, those payments will have to go indefinitely. Many of the old jobs are never coming back. Our economy is simultaneously attempting to recover and restructure.

Even if the nation started adding 2.15 million private-sector jobs per year starting this past January, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, just to eliminate the current jobs deficit.

That seems highly unlikely. Sadly, our nation's unemployment problem will be with us for many years to come.

The Goldman Sachs / Government Connection

"AIG exploited a huge gap in the regulatory system. There was no oversight of the Financial Products division. This was a hedge fund, basically, that was attached to a large and stable insurance company." - Fed Chairman, Ben Bernanke

Financial industry giants have taken hold of our government. By becoming "too big to fail," they are living out a calculated, self-fulfilling prophecy.

According to a TIME Magazine story from last year, Goldman Sachs and AIG made huge, irresponsible bets, seemingly with the explicit knowledge that the government would back them if / when they failed.

Goldman entered into a series of highly expensive contracts with AIG, surely knowing how risky they were. Yet they did so anyway. Only the assurance of a government bailout could have compelled such recklessness. The whole thing seemed to be orchestrated to blow up.

As the article pointed out, the government is absolutely littered with former Goldman execs. Obviously, that is a huge conflict of interest.

In a rare interview, former AIG CEO Hank Greenberg told TIME that once the company lost its top credit rating, AIG FP should have stopped writing swaps and hedged, or reinsured, its existing ones.

But AIG FP President Joe Cassano's unit doubled down after the spring of 2005, writing more and more subprime-linked swaps as the ratings plunged. This raised the potential for enormous amounts of collateral being needed in the event that its debt was subsequently downgraded.

Such downgrades eventually occurred in 2008.

Ultimately, AIG — which was bailed out by US taxpayers — ended up bailing out the very same Wall St. banks that had already been rescued by those same taxpayers.

Despite the investment banks having taken such enormous risks with such obvious consequences, the Fed still paid many of them in full. Heads, they win; tails, the taxpayers lose. Gains are private, while losses are public.

Ostensibly, the intention was to keep the financial system fluid. But this moral hazard was perhaps a bigger scandal than the highly controversial bonus payouts.

Many experts wondered why AIG paid 100 cents on the dollar. Among the biggest beneficiaries of the AIG pass-through, at $12.9 billion, was Goldman Sachs — the investment-banking house that has been the single largest supplier of financial "talent" to the government.

Critics have been quick to note — and not favorably — the almost uncanny influence of former Goldman executives.

Initial phases of the rescue were orchestrated by ex–Goldman chairman Hank Paulson, who was recruited as Treasury Secretary, in part, by former White House chief of staff and Goldman senior exec Josh Bolten.

Goldman's current boss, Lloyd Blankfein, was invited to participate in meetings with the Fed.

Recent AIG Chairman Edward Liddy is a former Goldman director and an ex-CEO of Allstate.

Another alum, Mark Patterson, once a Goldman lobbyist, serves as chief of staff at the Treasury, while Neel Kashkari, who ran TARP, was a Goldman vice president.

Goldman has repeatedly declared that its exposure to AIG was "immaterial" and fully hedged. But some rivals point to the fact that Goldman had uncharacteristically piled into contracts with a single counterparty.

"I am shocked that Goldman had this much exposure [to AIG]," says an analyst at a competing bank. "This was a major failing, but they got bailed."

How was AIG able to live so dangerously for so long? In part because for years Washington has looked the other way.

The company befriended politicians with campaign cash — $9.3 million divided evenly between Democrats and Republicans from 1990 to 2008, according to the Center for Responsive Politics.

And it spent more than $70 million to lobby them over the past decade, escaping the kind of regulation that might have prevented the current crisis.

So, in essence, our elected leaders were bribed to look the other way and allow these egregious transgressions to take place. And Wall St. was given carte blanche to do whatever it likes. It has essentially written its own rules.

In February 2000, one of Wall Street’s most powerful executives petitioned the Securities and Exchange Commission (SEC) to allow his firm and other investment banks to raise their levels of leverage.

He wanted the commission to alter something called the net-capital rule, which he said was “the single most important factor in driving significant parts of our business offshore.”

That exec was Henry Paulson, then the CEO of Goldman Sachs, and the previous U.S. Treasury Secretary.

So, in 2004, after hard lobbying by Paulson and other Wall Street execs, the SEC complied. It reversed its 1975 rule limiting investment banks to leverage of 15-to-1.

The amended rule allowed banks and other Wall Street firms to borrow even more money to finance their businesses. The new limit could be as high as 40-to-1 if the investment banks' own computer models said it was safe.

The most aggressive investment banks gladly took on these absurd leverage ratios. What this meant is that, for every dollar in equity capital a firm had, it could borrow $40.

Now those ratios are being unwound with a vengeance and we taxpayers are being held hostage to the process.

What has been hatched is a public/private partnership – amounting to a good ol' boys network – that is absconding with our tax dollars.

Nothing less than a revolving door exists between Wall St. and Washington DC, and back again, just like the Military-Industrial Complex. The whole scheme is appalling.

It is now abundantly clear that Goldman Sachs is nothing less than a mammoth criminal enterprise, and our government aids and abets them. In fact, our government is under Goldman's spell, if not outright control.

Alan Greenspan's Gold and Economic Freedom

Ayn Rand and her protégé, Alan Greenspan

Alan Greenspan wrote Gold and Economic Freedom in 1966, when he was 40-years-old. It appeared in Ayn Rand's Objectionist newsletter that year, and later in her non-fiction book, Capitalism, the Unknown Ideal, in 1967.

In it, the middle-aged Greenspan makes a strong and persuasive argument for the gold standard and against central banks.

After reading Gold and Economic Freedom, one can't help but wonder what happened to that Alan Greenspan. It hardly sounds like a man who would eventually go on to head the Federal Reserve.

As a fully formed adult, Greenspan underwent a total conversion as Fed Chairman and became a hypocrite. He completely betrayed his own ideals and abandoned the beliefs he had once argued so articulately.

The selection of Greenspan as head of the Federal Reserve was a curious one. Greenspan was a believer in Ayn Rand, a believer in free markets. That seems incompatible for a central banker, because central banking is nothing less than a massive intervention in the market through the setting of interest rates.

Greenspan recognized this incongruity himself, as he noted in his book, The Age of Turbulence:

"I knew I would have to pledge to uphold not only the Constitution but also the laws of the land, many of which I thought were wrong.

"I had long since decided to engage in efforts to advance free-market capitalism as an insider, rather than as a critical pamphleteer."

Included here, in its entirety, is the full text of Gold and Economic Freedom. It is an excellent read and clearly illustrates why holders of the US debt have good reason to be worried.

It is absolutely full of amazing quotes such as:

"The gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state).The welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes."

and...

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation... The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves."

and...

"Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process."

Without further adieu, please enjoy....


Gold and Economic Freedom
By ALAN GREENSPAN

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire-that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible.

More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, sea shells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has always been considered a luxury good. It is durable, portable, homogeneous, divisible, and, therefore, has significant advantages over all other media of exchange. Since the beginning of Would War I, it has been virtually the sole international standard of exchange.

If all goods and services were to be paid for in gold, large payments would be difficult to execute, and this would tend to limit the extent of a society's division of labor and specialization. Thus a logical extension of the creation of a medium of exchange, is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security for his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth.

When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one--so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold, and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post- World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline- argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely--it was claimed--there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (paper reserves) could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.

The "Fed" succeeded: it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.)

But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited.

The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets.

The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.


During the height of the financial crisis, in October 2008, Greenspan was called to Capitol Hill to testify before Congress. In his testimony, Greenspan clearly seemed to regret his earlier conversion, refuting the views he had professed for 18 years as Fed Chairman. These views had led him to continually inflate the nation's money supply and manipulate its interest rates.

“I made a mistake in presuming that the self-interest of organizations — specifically banks and others — were such as that they were best capable of protecting their own shareholders and their equity in the firms."

Greenspan also said that he was “shocked" and professed, “I still do not fully understand why it happened, and obviously to the extent that I figure out where it happened and I — I will change my views. The facts change; I will change.”

"I found a flaw," said Greenspan. "I don’t know how significant or permanent it is. But I have been very distressed by that fact.

"I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works."

"In other words, you found that your view of the world, your ideology, was not right, was not working," replied Rep. Henry Waxman.

"Precisely. That’s precisely the reason. I was shocked because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well."

Until suddenly it didn't.